Columnists: Andrew Warren, British Energy Efficiency Federation

Published on: 25 Nov 2016

Absurd accountancy rules deter energy saving investments

A public programme that ensures approaching £700m of direct investment into energy efficiency measures is well worth checking out. Especially if it forms part of an initiative which its proponents maintain is delivering £2.74 for each £1 invested.

The programme in question is the cohesion policy of the European Union. Responsible for 35% (346.5bn euros) of the total EU budget, for much of its existence it had no role or interest regarding energy usage. However ever since 2007 improving energy efficiency, particularly in public and residential buildings, has been a quite specific policy stream. Or “thematic work package”, in Euro-jargon.

Between 2007 and 2013 some 4.7bn euros, drawn from the Cohesion Fund and the European Regional Development Fund, was invested in precisely this area. That may be just 2% of the total cohesion budget. But in nine of the poorest European countries, it accounted for more than one-third of relevant capital expenditure. The average proportion was just 6.5%. And in the ten richest European countries, the proportion was closer to only 1% of total investment – as was true in the UK.

As with all EU programmes, this one was subject to intense and detailed examination by external auditors.  They did an excellent job. And came up with some very perceptive recommendations

Their role was inevitably complicated by the novelty of this expenditure area, which led to the conclusion that around 15% of the projects they studied in detail simple were not restricted just to public or residential buildings, but instead included “other types of energy investments.”

Around two-thirds of the new policies involved supporting grants, rather than loans or other financial instruments. The auditors were particularly critical of the use of grants to stimulate improvements in public sector buildings. They felt that these should have been restricted only to supporting  “deep renovations“ or more experimental materials, or where these were intended to offer exemplars to the private sector. Grants should not have substituted for expenditure upon investments that were already cost-effective for the public purse in their own right.

There are, say the auditors, “strong arguments in principle for the use of loans rather than grants, particularly those with a clear perspective of an early payback of investment costs through reduced energy costs.”

Whilst the auditors may well be right in economic theory, it is perfectly obvious why it is grants rather than loans that are actually happening.  The reason is very largely due to official rulings issued by the European statistical directorate called Eurostat, the official role of which is to ensure “the harmonisation of statistical methods”.

Under its current interpretation of accounting rules, Eurostat considers spending by public authorities upon building renovation, even using energy performance contracting with energy service companies, as debt financing.  Absurdly this restriction remains even when it is the private sector company taking on the loan debt. Even though the entire rationale behind such investments is to reduce subsequent public expenditure.

This means that, in so many cases, the public sector runs into problems because investment in energy efficiency programmes is deemed to increase the official deficit. The European Commission fully appreciate that this is a problem and have been busily engaged in trying to solve it.  For that matter, civil servants within Eurostat understand the issue too.

But Eurostat operates under rules set by the various European governments, rather than by the Commission. So it requires a call from these Governments – which still include the UK - to change the rules.  So that public authorities can invest to save without falling foul of these arcane accounting shibboleths.

If this is so sensible, how come there is still such a blockage?  The reason is simple. The precise people who deal with Eurostat are the national civil service representatives dealing with “Excessive Deficit Procedure”. These all come from national Finance Ministries, like HM Treasury. And are therefore neither the best informed on the virtues of energy efficiency as an investing to save concept. Nor indeed the easiest people to contact, let alone, convince.

To be fair to the auditors of the cohesion programme, they do acknowledge “constraints” (albeit unspecified) upon “public authorities taking on loan commitments.” They also recognise that there can be what they delightfully terms “cultural resistance” by householders to “accept loan commitments”, as the British experience with Green Deal Finance packages clearly revealed.

So what were the overall savings achieved from these differing programmes?  The problem has been that there was never any common template agreed which would permit easy comparisons and conclusions.  With reluctance, the auditors have concluded, “it is not possible to calculate a single figure for the energy efficiency achievements of 2007/2013 programmes, due to the disparate and non-comparable data provided by programmes.”

But one thing is clear to the auditors. If the developed world is to maximise the opportunities – social, financial and ecological – that improved energy efficiency brings, there will need to far more investment in energy efficiency than even an expanded Cohesion programme can provide. National governments will need to do far more to push energy efficiency from now on.

Remember that the European Treaty states that all “shall promote economic, social and territorial cohesion, and solidarity among Member States.” Even if the UK is opting out of any further “solidarity”, continuing to run programmes that create greater economic and social cohesion must make sense. Even just within our own country.

The views expressed in this column are those of the columnist and do not necessarily reflect the views of eceee or any of its members.

Other columns by Andrew Warren